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Questions and Answers
What is the short run equilibrium of a firm under perfectly competitive market?
In the short run, a firm under perfect competition will produce at the point where marginal cost equals marginal revenue to maximize profits.
What are the sources of Monopoly power?
The main sources of Monopoly power are barriers to entry, control over scarce resources, patents, and economies of scale.
Explain the meaning and features of monopolistic competition.
Monopolistic competition is a market structure characterized by many firms selling similar but not identical products, with low barriers to entry and product differentiation.
What is the short run equilibrium of a firm under monopoly market?
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Discuss the short run equilibrium of a firm under monopolistic competitive market.
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What is the main purpose of Capital Budgeting?
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Which method of Capital Budgeting focuses on the time it takes to recover the initial investment?
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What is a major advantage of using the Net Present Value Method in Capital Budgeting?
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In Capital Budgeting, what is the Internal Rate of Return?
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When practicing numerical problems for Internal Rate of Return, what does it aim to calculate?
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Study Notes
Perfect Competition
- A firm in a perfectly competitive market is a price-taker, meaning it has no control over the market price.
- The short run equilibrium of a firm under perfect competition is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
- The profit maximization principle is achieved when the firm's marginal revenue equals its marginal cost.
- In the long run, the firm will continue to produce as long as the average revenue is greater than or equal to the average cost.
Monopoly
- A monopoly is a market structure in which a single firm supplies the entire market with a particular good or service.
- The sources of monopoly power include:
- Government grated monopoly
- Ownership of a key resource
- Patents and copyrights
- High barriers to entry
- The short run equilibrium of a firm under monopoly is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
- The long run equilibrium of a firm under monopoly is achieved when the firm's marginal revenue equals its marginal cost, and the firm has no incentive to change its price or output.
Monopolistic Competition
- Monopolistic competition is a market structure in which many firms produce differentiated products that are close substitutes for each other.
- The features of monopolistic competition include:
- Many firms and free entry
- Product differentiation
- Non-price competition
- Excess capacity
- The short run equilibrium of a firm under monopolistic competition is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
- Excess capacity is a characteristic of monopolistic competition, where firms produce below their capacity to maintain prices and avoid competition.
Advertising
- Advertising has both positive and negative impacts on the economy:
- Positive impacts: increased consumer awareness, increased competition, and economic growth
- Negative impacts: misleading information, waste of resources, and barriers to entry
Oligopoly
- Oligopoly is a market structure in which only a few firms compete with each other.
- The features of oligopoly include:
- Few firms and high barriers to entry
- Interdependent decision-making
- Non-price competition
- Oligopoly markets can be either collusive or non-collusive:
- Collusive oligopoly: firms cooperate to maximize joint profits
- Non-collusive oligopoly: firms compete with each other
Capital Budgeting
- Capital budgeting is the process of evaluating and selecting investment projects that are profitable for the firm.
- The steps in capital budgeting include:
- Project identification
- Project evaluation
- Project selection
- Project implementation
- The importance of capital budgeting lies in its ability to maximize the firm's value and profitability.
Pay Back Period Method
- The Pay Back Period Method is a capital budgeting technique that evaluates projects based on the time it takes to recover the initial investment.
- The advantages of the Pay Back Period Method include:
- Easy to understand and calculate
- Focus on liquidity
- The disadvantages of the Pay Back Period Method include:
- Ignores the time value of money
- Does not consider the project's profitability
Net Present Value Method
- The Net Present Value Method is a capital budgeting technique that evaluates projects based on their present value of future cash flows.
- The Net Present Value Method is considered a superior technique because it:
- Considers the time value of money
- Evaluates the project's profitability
Internal Rate of Return Method
- The Internal Rate of Return Method is a capital budgeting technique that evaluates projects based on the rate at which they generate returns.
- The Internal Rate of Return Method is considered a superior technique because it:
- Considers the time value of money
- Evaluates the project's profitability
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Description
Test your knowledge on various market structures in economics including perfectly competitive market, monopoly, and monopolistic competition. Learn about short run and long run equilibrium, profit maximization principle, and sources of monopoly power. Explore the positive and negative impacts of advertisement in economic markets.